Last week, our blog focused on terrible news in the economy – specifically, an anemic 1Q 2014 GDP reading—and the fact that the market barely reacted to it. The market continued to plug along despite poor fundamental data.
I was secretly hoping for another example to illustrate my point, this time with substantial positive news which the market could ignore. My wishes were answered on Friday. The unemployment rate fell to a 5 year low – 6.3%. The rate of unemployment improvement was also significant. Instead of a gradual, sloughing off of 0.1% at a time, the rate improved from 6.7% to 6.3% in a single month. Job creation was surprisingly strong, with 288,000 jobs created in the month. Furthermore, job creation numbers were revised upward for the previous two months. You’d expect a huge jump in consumer confidence, but it didn’t happen.
The economy was abnormally depressed because of the weather in the first quarter, so investors interpreted the poor GDP results with awareness beyond the headlines. Similarly, the rebound in the labor market reflected a deferred, but expected, improvement in the economy. Investors did not react with irrational exuberance: Instead they understood that the pent up demand for employment was simply satisfied at an irregular pace.
After all the news was absorbed, the market, measured by the S&P 500, was up a modest 0.97% for the week. The trend of modest, sub-par returns was essentially unbroken by the economic headlines because investors realize that the underlying forces acting upon the markets have not substantially changed.